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ZURICH (Reuters) - Jeweller Harry WinstonHW.TO is selling its high-end watches-to-necklaces division to Swatch Group(UHR.VX) in a $750 million (£467 million) cash deal that expands the Swiss watchmaker's luxury offering and lets the Canadian group concentrate on its diamond mines.

Monday's deal reverses a 2004 acquisition which turned Harry Winston, the group that discovered what became Canada's Diavik diamond mine - now controlled by Rio Tinto (RIO.L) - into a miner and jeweller.

The original mining arm is renamed Dominion Diamond Corporation after the sale of the Harry Winston luxury business, which started as a small jeweller in New York in 1932 and rapidly became a favourite with movie stars.

For Swatch, the deal is evidence of the benefits of strong Asian demand for watches, handbags and other high-end items that has given companies the firepower to expand their portfolio.

Harry Winston - which Marilyn Monroe mentioned in her song "Diamonds are a girl's best friend" - has the potential to generate more than 1 billion Swiss francs ($1.10 billion) in sales and 250 million net profit in about 4-5 years, Swatch chief executive Nick Hayek told Reuters in an interview.

Swatch Group is already the world's biggest watchmaker by sales, with 8.1 billion francs sales in 2012 thanks to brands such as Omega. Buying Harry Winston allows it to enter high-end jewellery, a market dominated by Richemont (CFR.VX) with its flagship brand Cartier.

"If watches continue to grow as dynamically as in 2012, 9 billion franc sales are within reach in 2013. Now in view of this acquisition, it can of course be even more," said Hayek.

For the group, which is best known for its colourful Swatch plastic watches, the deal marks a new attempt to get a foothold in high-end jewellery. Its partnership with U.S. jeweller Tiffany(TIF.N) ended in 2011 with the companies suing each other.

Swatch Group and Dominion Diamond Corporation will continue to work together through a diamond sourcing deal under Monday's purchase, which includes Swatch taking on $250 million of debt. The two companies will also consider opportunities for a joint diamond polishing venture.

"From a strategic perspective it is positive - Swatch Group has long said it wanted to expand in jewellery," Kepler Capital Markets analyst Jon Cox said. "At first glance it does not look cheap, but that is probably more a reflection of the profitability of Harry Winston at this stage, which is in ramp-up stage in terms of expansion."

Reuters reported in October last year that Harry Winston was considering splitting off and selling its watch and jewellery business. At the time, analysts put the value at around $770 million, but said they expected a premium, comparing the deal with the acquisition of jeweller Bulgari by the world's biggest luxury goods group LVMH (LVMH.PA) for $5.2 billion in 2011.

Harry Winston was made famous by Marilyn Monroe's reference in the film "Gentlemen Prefer Blondes". Every year the firm lends out hundreds of millions of dollars' worth of jewels to be worn by movie stars at events like the Oscars.

Its strong position in the U.S. and Japanese markets is a draw for Swatch Group, Hayek said, adding that he also saw a lot of potential for the brand in Europe.

Citi analysts said they expected earnings before interest, tax, depreciation and amortisation (EBITDA) at Harry Winston's luxury unit to rise to 15 percent in the full year ending in January 2014 from 8 percent two years earlier, implying an enterprise value to EBITDA ratio of 13.5 percent.

"(This) appears to be reasonable compared to recent deals in the sector," Citi's Thomas Chauvet said in a study, noting that LVMH acquired Bulgari in March 2011 at a far higher multiple.

Vontobel's Rene Weber called the purchase "a great fit for a high price". Under Swatch Group's ownership, the share of watches at Harry Winston should rise to 40-45 percent from about 25 percent currently and profitability should increase, he said.

Shares in Swatch Group were up 3.7 percent at 1307 GMT, outperforming the sector index .SXQP which was little changed.

RED CARPET EVENTS

"The Harry Winston brand now has a new home that can provide the skills and support that it deserves to realize its true potential," said Robert A. Gannicott, chairman of the board and chief executive of Harry Winston Diamond Corp.

For the mining arm, this will mean focusing on becoming one of a handful of pure-play diamond companies at a time when the gems are increasingly scarce and prices are expected to rise.

Harry Winston bought BHP Billiton's (BHP.AX) (BLT.L) EKATI diamond mine in November for $500 million, betting on rising prices. Its partner in Diavik, mining giant Rio, is also reviewing its involvement in diamonds and could sell operations which include Diavik and the Argyle mine in Australia, famous for its pink diamonds.

Mergers and acquisitions in the watchmaking industry have also been boosted by Swatch Group's decision to cut back on watch component and movement deliveries, forcing peers to improve their access to watchmaking know-how.

Swatch Group itself has bought more than a dozen component makers over the last 10 years, its most recent buys being watch case maker Simon & Membrez and a 60 percent stake in case polisher Termiboites last year. The last watchmakers it took over were high-end brands Glashuette Original and Jaquet Droz in 2000.